Feb 26, 2010

Why Live Frugally Now? Reason #4 (Janssen)

I am willing to live frugally now so that in the future I can be financially independent.

I was listening to Dave Ramsey's podcast recently and a woman in her late forties called in to say that she was really anxious to start paying down their debts and getting ahead financially. Her husband (who was in his early fifties), however, was not at all on-board, feeling that they were just fine the way they were. After all, they made a pretty substantial income and they could certainly afford their monthly payments.  Dave Ramsey asked her how much cash they would have if they sold everything they had, including cars and their house, and paid off all their debts. Her answer? About $50,000.

Can you imagine being ten years from retirement age and having a net worth of only $50,000? This woman's husband had probably been working for 30 years, which means he had less than $2,000 per year to show for all his hard work. You could not live for very long on $50,000, especially when that $50,000 is tied up in your house and car.

This couple is in the financial position of people a fraction of their age - people in their late twenties, perhaps. How will this couple, or others who live like them, ever be able to retire? If you spend everything you earn, you are just treading water, never getting closer to being able to retire and to letting your money earn enough to cover your expenses.

At some point, wouldn't it be nice to wake up every morning and go to work just because you WANT to, and not because you NEED to in order to keep a roof over your head?

Ideally, after thirty years of work, you'd have a house that you owned free and clear, one or two cars that were completely paid off, an emergency fund that could cover your living expenses for 6-12 months, and some hefty retirement and investment accounts. And it'd be even more awesome if, because you'd been frugal, you'd also been able to be generous with your money, and to have taken some nice vacations as a family or a couple over the years.

Most of us will make more money as time goes on - better jobs, more experience, more responsibility, new raises, etc - but if spending increases at the same rate (or, terrifyingly, even faster), we'll never be able to retire because our expenses will be increasing and we'll never move any closer to the goal of being able to live without jobs to support us.

If you pay for a big house, fancy cars, a boat or ATVs, ritzy vacations or whatever your splurge of choice is, but you pay for it all on credit and you'd lose it if the economy tanks (does that sound familiar?) or if you lost your job, you. are. not. wealthy. You're just living like you are. Wealth is owning your own possessions, being prepared for emergencies, and not being dependent on your next paycheck in order to keep your BMW sitting in the driveway.

My goal is for each year to bring us closer to financial independence - for our lifestyle to not be dependent on a steady paycheck. Instead, ideally, our savings and investments will grow enough to cover all our bills and still continue to grow. I'm willing to watch my spending and practice frugality now in order to see progress on a monthly and yearly basis toward my long-term goals, so that when my husband and I are in our fifties, we aren't in the same financial situation we are in today.


Lisa C said...

Good point! A financial advisor that spoke at a Relief Society activity this week advised that the first priority be these long term savings. You figure out your savings goals (retirement, kids college, etc) and monthly contributions to them, then plan your living expenses with the remainder of the money, not the opposite. That seemed counterintuitive to me at first, but may be the best way to every actually reach that goal of independence.

Tara said...

I like Dave Ramsey. My parents gave us one of his cds for Christmas. How did you listen to his podcast?

Carole said...

Go to this link
http://www.daveramsey.com/radio/home/#podcast-tab and you can listen to the podcasts through iTunes. Or you can listen to his show live also, if you hit the times right. This link will also help you find the radio station in your area that carries his show and what the broadcast times are.

Hope this helps. The calls are very informative and motivating!

tootie said...

Good example! Dave Ramsey has some great advice. I attended his Financial Peace University at a local church, and I learned so much!

Erin Gong said...

Abe & I put together a spreadsheet that totaled how much we would need to save each year in order to have $1 million in savings when we're 65. (Note: we reach a new level of nerdiness by accounting for inflation rates so that it was actually 2050's equivalent to $1 million).

Two things surprised me. First, $1 million wasn't completely out of range - we could actually make it by age of retirement. Second, the biggest difference in whether we could make the goal or not was how much money we save in the next 5-10 years. We could double our savings $s later on in life and make very little difference in our actually savings. Right now is when it matters.

Needless to say, we immediately upped our IRA contributions.